How Family Status and Social Security Claiming Options Shape Optimal Life Cycle Portfolios

Published: 2013


Household decisions are profoundly shaped by a complex set of financial options due to Social Security rules determining retirement, spousal, and survivor benefits, along with benefit adjustments that vary with the age at which these are claimed. These rules influence optimal household asset allocation, insurance, and work decisions, given life cycle demographic shocks such as marriage, divorce, and children. Our model generates a wealth profile and a low and stable equity fraction consistent with empirical evidence. We also confirm predictions that wives will claim retirement benefits earlier than husbands, while life insurance is mainly purchased by younger men. Our policy simulations imply that eliminating survivor benefits would sharply reduce claiming differences by sex while dramatically increasing men’s life insurance purchases.

Key Findings

    • We model Social Security claiming behavior in a policy simulation that eliminates survivor benefits.
    • We take into account household asset allocation, life insurance purchases, and work and retirement decisions.
    • We realistically calibrate the model using empirical evidence on time use, demographics and wage rates.
    • We predict and confirm in longitudinal data that Social Security rules induce married women to claim retirement benefits much earlier than single women and married men.
    • We find that eliminating widows’ Social Security benefits would dramatically narrow claiming differences between men and women, while substantially increasing men’s life insurance purchases.